Remember when Wall Street was the place to get rich fast in the 1990s? That was a big mistake. As we all know, actively trading stocks proved hazardous to individual investors. Trillions of dollars vaporized and speculative fevers cooled during the three yearlong bear market-the longest since 1939 to 1941. Finance economists have well documented that individual investors are lousy traders. They hold on to losing stocks for too long, sell their winners too early, gullibly follow the advice of television touts, underestimate their risk tolerance and overestimate their stock picking acumen.

Okay, there’s no question that many individual investors acted foolishly with their savings in the ‘90s. Sound Money has consistently argued that individual investors should focus on building up their portfolio around long-term core holdings of low-cost index funds. A well-diversified portfolio both reduces investment risk and increases the odds that you’ll earn a decent return over time.

That said, speculation is getting bum rap. It’s fun to take bets in the stock market, matching wits against some of the brightest minds in the world, trying to come out ahead in the most competitive open bazaar in the world. Even more important, the impulse to gamble is behind the entrepreneurial spirit, the “animal spirits of capitalism” that have launched so many new businesses and technologies.

We have all heard the horror stories. But many individual investors that took a flyer on stocks may have acted more sensibly than current lore holds. That’s one way to read a recent paper by Meir Statman, professor of finance at Santa Clara University.

Statman respects individual investors as they are rather than bemoaning their shortfalls compared to some economic ideal. For instance, modern portfolio theory assumes that people are risk averse and, therefore, that there is something wrong when investors invest in a handful of stocks-a very risky strategy. But Statman argues that most investors are both risk takers and risk avoiders. The people who took a chance on a high-flying tech stock often invest regularly in mutual funds through their retirement savings plan.

The research on gambling is instructive. People who buy insurance policies often buy lottery tickets. Gamblers have more downside financial protection than non-gamblers, too. As University of Chicago economists Milton Friedman and Leonard Savage noted in a classic 1948 paper, people buy lottery tickets because they aspire to be rich but they buy insurance as protection against falling into poverty.

The same goes with stock picking. It’s a rational strategy to invest in a well-diversified core portfolio as downside protection, say, in a 401(k) plan, and to own a handful of stocks in a brokerage account in an attempt to strike it rich.

These days, avoiding risk is all the rage. But why not take a flyer every once in a while, so long as you have a sound hedge against the downside. You might have some fun, and make some money along the way.

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